Montana State Life Insurance Practice Exam

What is a cost index?

1. A method of calculating interest rates

2. A uniform basis to compare the relative costs of similar plans of insurance

3. A measure of investment returns

4. A statistical analysis tool used in insurance

The correct answer is: A uniform basis to compare the relative costs of similar plans of insurance

A cost index serves as a valuable tool for evaluating and comparing the relative costs associated with different insurance plans. By providing a standardized measure, it allows consumers, agents, and insurers to analyze various insurance options on an equivalent basis, considering factors such as benefits, coverage, and premiums. This comparison is crucial because it helps policyholders make informed decisions when selecting insurance that best fits their needs and budget. While other options touch upon financial elements and statistical analyses, none of them specifically address the primary function of a cost index in insurance. For instance, calculating interest rates or measuring investment returns relates to different financial metrics and concepts, while a statistical analysis tool, although useful in insurance analysis, does not serve the specific purpose of cost comparison among insurance plans.